A lending institution such as a bank provides a loan to a debtor in return for periodic time payments at a set rate of interest. The time payments are due at predetermined payment intervals, typically every month, during the period or the term sometimes defined by the number of time payments term or period of the loan. The term is sometimes defined by the number of time payments. Part of each time payment is generally allocated to paying interest on the loan, and the remainder of the payment is allocated to reducing the amount owed, known as the principal balance of the loan, and any escrow deposits. The allocation between interest and principal varies with each time payment. Most of the initial time payments are allocated to interest, while smaller amounts which are allocated to principal increase as subsequent time payments are made throughout the term of the loan. The reduction in the principal balance by the time payments is known as amortization. Known methods of calculating interest rates and amortization payments are disclosed in "The Mathematics of Investing: A Complete Reference" by Michael Thomsett, pp. 23-40.
Modern lending institutions employ computer-based loan management systems which store and process information on loans to debtors. Known systems for managing loan amortization include a device for inputting data identifying a debtor, the amount of the loan to the debtor, the principal balance of the loan, the rate of interest payable on the principal balance of the loan and the term of the loan. The input device may be a keyboard, mouse or other peripheral device of a computing platform which operates in accordance with user interface software to transfer signals indicative of the identifying data to memory. The input device also receives and records signals indicative of time payments from the debtor for credit toward principal and interest on the loan.
The memory is a device, such as a conventional computer memory module, which stores the identifying data. As is known in the art, the above-described identifying data stored in memory are typically implemented as digital electrical signals which represent ASCII characters or binary numeric values.
In response to a time payment, a loan payment module receives the time payment signals and determines the appropriate allocation of the time payment between interest and principal in accordance with known amortization methods. A loan origination and administration module tracks the reduction in the principal by the time payment, and the reduced principal balance is stored in the memory. If a time payment is not received within a payment interval, the loan origination and administration module records the delinquency in memory and typically adds a late payment fee to the amount of the loan owed.
Financial loans may be classified as fixed-rate or variable-rate. In a fixed-rate loan, a prevailing interest rate at the time the loan is made determines the rate of interest for the entire term of the loan. In a variable-rate loan, a prevailing interest rate at the time the loan is made determines the initial rate of interest. However, at set dates the rate of interest of a variable-rate loan is adjusted in accordance with a time-varying interest-rate index, such as the rate of interest payable on Treasury Bills. Interest-rate indices typically fluctuate several times a year, and may fluctuate by substantial amounts during the term of a loan. Such changes in rates are beyond the variable-rate debtor's control, and may be to his advantage or detriment depending on whether the interest rate has decreased or increased on the adjustment date.
Conventional systems for managing the amortization of loans process signals indicative of each loan in accordance with fixed-rate loan processing methods or variable-rate loan processing methods. For example, for a fixed-rate loan, the signals indicative of the rate of interest of the loan remain fixed in memory. Similarly, for a variable-rate loan, the signals indicative of the rate of interest of the loan are automatically adjusted in accordance with signals indicative of a fluctuating interest-rate index.
A debtor having a fixed-rate loan may find that after receiving a loan at a fixed rate of interest, interest rates decrease substantially below the fixed rate associated with his loan. Naturally, the debtor prefers a loan with a low rate of interest so that the time payment amount will be as low as possible. Unfortunately, a drawback of a fixed-rate loan is that the debtor cannot automatically take advantage of decreases in interest rates. On the other hand, the fixed-rate debtor is not adversely affected by increases in interest rates which work against variable-rate debtors. Accordingly, known systems for managing loan amortization do not adjust the signals indicative of the interest rate on fixed-rate loans.
To take advantage of a decrease in interest rates, the fixed-rate debtor must refinance his loan, that is, re-apply, re-qualify and take out a new loan at the decreased rate of interest. Refinancing is a costly option which involves a number of fees, such as fees paid to the lending institution, attorneys and title searchers. Therefore, refinancing is not a viable alternative unless interest rates have dropped significantly below the initial interest rate associated with the fixed-rate loan. Accordingly, known systems for managing loan amortization do not automatically implement refinancing of a fixed-rate loan.
It would be advantageous to have a system for managing the amortization of a loan which automatically resets the rate of interest stored in memory in response to the debtor's election, yet holds the initial rate of interest stored in memory fixed in the absence of such an election. The present invention is drawn towards such a system.